Foreign Investment Rules in the World Economy: Leaving Room for Development? Kevin P. Gallagher Global Development and Environment Institute

Three Key Points Investment rules do not bring investment in and of themselves Foreign investment does not automatically bring growth and sustainable development Global investment regime is needed but current proposals will not foster sustainable development

Foreign Investment and Foreign Aid, 1990 to , , , ,000 1,000,000 1,200,000 1,400,000 1,600, $US millions

Foreign Investment Trends in Context Developing country share of World Inflows has been small—only 25% of the total 3 nations receive the bulk of developing country investment (China, Mexico, Brazil) Foreign aid outweighs 55 of the 70 poorest countries Investment rules don’t necessarily increase the amount or quality of investment Investment flows have been sharply decreasing since 2000

World Investment, 1990 to , , , ,000 1,000,000 1,200,000 1,400,000 1,600, * Inflows ($ millions) World Developed Countries Developing Countries

10 Largest Developing Country Recipients of FDI inflows Top 10( )Top ave China*43.4China*69.7 Brazil12.0Mexico24.7 Mexico10.1Brazil22.5 Argentina7.2Bermuda9.9 Singapore7.1Poland8.8 Malaysia4.7Singapore8.6 Bermuda4.7Chile5.5 Poland3.7Czech Republic4.9 Chile3.3Taiwan4.1 South Korea3.2Thailand3.8 Top 10 total: Total For Developing Countries: Top 10 share:76%81% Top 3 share:50%58% ($US billions)

FDI follows growth: the peer-reviewed literature Size of the market Proximity to markets Growth rate of host economy Relative wages Macroeconomic stability

FDI doesn’t automatically create growth: the recent peer-reviewed lit 15 most recent studies found –3 “no” correlation –2 “yes” correlation –10 (growth occurred when nations had corresponding national policies to harnessFDI)

FDI and Corporate Social Responsibility Hundreds of billions invested in CSR funds worldwide ($1.2b DSI) 18 of the 25 largest US firms in the world do not pass socially responsible investment screens 24 of the 42 largest US firms in Latin America do not pass socially responsible investment screens Intel, Xerox, and Hewlett-Packard are seen as “leader” investors in their overseas operations Alcoa, Monsanto and Eastman Kodak are seen as “laggard” investors

Not More but Better: Case Study Evidence Joint venture agreements Local content standards Home office/country policies Advocacy efforts

Pressing for Sustainability in Investment Rules 1.Make sustainable development, not simply increases in investment, the goal of investment agreements 2.Protect national “policy space” (performance requirements etc) for developing countries 3.Negotiate separate framework agreement on investment at regional, bilateral, or global levels (not in the WTO)

A “Better” Approach to Investment Rules Preserve the right to regulate Post-establishment rights only FDI only Non-discrimination—clearly defined and according to national regulations No extension of performance requirements Dispute settlement—state-to-state

Environmental Kuznets Curve GDP per Capita Pollution

Empirical Evidence of EKC Only applies to criteria air pollutants in developed countries Turning points much higher than previously estimated Does not apply to historical time- series in single countries Can be explained by factors other than income